There are a number of advantages when operating your business as a limited company that could well compensate the initial costs of incorporation and the slightly higher running costs.
1. Limited liability.
Unlike trading as a self-employed individual, a company only risks its registered capital and assets before its suppliers and creditors. Though there are certain situations in which the director of the company is personally liable with his own assets before the authorities ( Tax Office and Social Security), this is only in cases where it is been proven that he as been negligent regarding certain obligations.
2. Less Tax for the profit.
When an ‘autonomo’ makes a profit he initially pays 20% of the profit as Income Tax. However, this is not all the tax that he may pay. The tax rate for an individual is gradual and it can reach up to 45%. The actual tax liability is calculated after the end of the tax year when the tax return is submitted.
Companies are subjected to corporation tax. 25% of the profit in the case of small companies. This contrasts with the 45% Income Tax that an individual would have to pay for every extra euro made after 50,000€.
3.Pay more tax only when you give the profit “private use”.
Self-employed people pay tax for every euro of the positive balance of the year at the highest possible rate. If the funds are finally used, for example, to reinvest in their business in a later tax year, these are taxed at a “consumption tax rate” ( personal Income tax) even though they were never used to that end.
When this very same situation happens in a limited company, the profit is taxed at 25% because it never went out of the company but stayed to be reinvested, it is never taxed at a high “consumption rate”. Only when you really are going to use funds for personal use is when you would pay the highest possible tax.
4.Better public image.
Companies project a much better business image than that of a self-employed person. Companies offer an impression of “doing business seriously” bBefore suppliers and other creditors. Among the regular obligations of companies is the submission of annual accounts to House of Companies which makes them public. This provides confidence to third parties too.
Business agents or investors will not typically invest in a sole-trader’s business. If you plan to develop a business, attract capital, or sell shares this is the most advisable legal form.
5. Easier to sell.
A limited company is the most recommended legal form if you plan to “own a business” instead of “owning an employment”.
When a business is run as an “autonomo” the whole structure is centered in the individual. The ‘autonomo’ is the engine and his presence is vital for the existence of the business.
By contrast, in a company, the owner is a separate agent. New partners may join in later.
Licenses or contracts owned by the company would not cease if the owner sold his shares because they belong to the company. This is ideal to build up a structure that can be passed on to someone else or incorporate new people (investors or strategical partners) in the future.
For a consideration on preparing a business to be sold later or buying an existing one, read our article:
In addition to these reasons, companies enjoy more flexibility as to ways to deduct tax with purchases, transfer profit (dividends or salary) to the owner, etc….